CHAPTER 6 EXERCISES AND PROBLEMS
Solutions
EXERCISE 6-24 (15 MINUTES)
1.
Cost per Broadcast Hour
July
September
Cost Item
Production crew:
$4,875/390 hr. ............................................
$8,000/640 hr. ............................................
Supervisory employees:
$5,000/390 hr. ............................................
$5,000/640 hr. ............................................
$12.50 per hr.
$12.50 per hr.
12.82 per hr.*
7.81 per hr.*
*Rounded.
2.
December cost predictions:
Production crew (420  $12.50 per hr.)..............................................
Supervisory employees.......................................................................
$5,250
5,000
3.
Cost Item
Production crew .........................................................
Supervisory employees ($5,000/420 hr.) .................
Cost per Broadcast Hour
in December
$12.50 per hr.
11.90 per hr.*
*Rounded.
EXERCISE 6-25 (15 MINUTES)
1.
Variable cost per pint of applesauce produced =
$24,100  $22,100
 $.10
41,000  21,000
Total cost at 41,000 pints ............................................................................
Variable cost at 41,000 pints
(41,000  $.10 per pint) ......................................................................
Fixed cost .....................................................................................................
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$24,100
4,100
$20,000
Cost equation:
Total energy cost = $20,000 + $.10X, where X denotes pints of applesauce produced
2.
Cost prediction when 26,000 pints of applesauce are produced
Energy cost = $20,000 + ($.10)(26,000) = $22,600
EXERCISE 6-26 (30 MINUTES)
1.
Scatter diagram and visually-fitted line:
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Monthly energy cost
$30,000

$25,000
 

  

$20,000
$15,000
$10,000
$5,000
10,000
20,000
30,000
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40,000
50,000
Pints of apple
sauce produced
EXERCISE 6-26 (CONTINUED)
2.
Answers will vary on this requirement because of variation in the visually-fitted lines.
Based on the preceding plot, the cost prediction at 26,000 pounds is:
Energy cost = $22,600
3.
The July cost observation at the 40,000-pint activity level appears to be an outlier.
The cost analyst should check the observation data for accuracy. If the data are
accurate, the outlier should be ignored in making cost predictions.
EXERCISE 6-29 (15 MINUTES)
1.
2.
a.
Fixed
b.
Variable
c.
Variable
d.
Fixed
e.
Semivariable (or mixed)
Production cost per month = $33,000* + $2.00X †
*33,000 = $19,000 + $10,000 + $4,000
†$2.00
= $1.10 + $.70 + $.20
EXERCISE 6-30 (15 MINUTES)
1.
Variable maintenance
cost per tour mile
= (12,500r-11,000r) / (20,000 miles – 8,000 miles)
= .125r
r denotes the real, Brazil’s national currency.
Total maintenance cost at 8,000 miles ........................................................
Variable maintenance cost at 8,000 miles (.125r  8,000) .........................
Fixed maintenance cost per month .............................................................
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11,000r
1,000r
10,000r
2.
Cost formula:
Total maintenance cost per month = 10,000r + .125rX , where X denotes tour miles
traveled during the month.
3.
Cost prediction at the 22,000-mile activity level:
Maintenance cost
=
10,000r + (.125r)(22,000)
=
12,750r
SOLUTIONS TO PROBLEMS
PROBLEM 6-36 (25 MINUTES)
1.
Machine supplies: $102,000  34,000 direct-labor hours = $3 per hour
January: 23,000 direct-labor hours x $3 = $69,000
Depreciation: Fixed at $15,000
2.
Plant maintenance cost:
Total cost*……………………..
Less: Machine supplies…….
Depreciation…………..
Plant maintenance…………...
March
January
(34,000
hrs)
(23,000
hrs)
$ 586,000
(102,000)
(15,000)
$ 469,000
$ 454,000
(69,000)
(15,000)
$ 370,000
* Excludes supervisory labor cost
Variable maintenance cost = difference in cost  difference in direct-labor hours
= ($469,000 – $370,000)  (34,000 – 23,000)
= $99,000  11,000 hours
= $9 per hour
Fixed maintenance cost:
March
January
(34,000 hrs) (23,000 hrs)
Total maintenance cost……………….
Less: Variable cost at $9 per hour….
Fixed maintenance cost………………
6-5
$469,000
306,000
$163,000
$370,000
207,000
$163,000
3.
Manufacturing overhead at 29,500 labor hours:
Machine supplies at $3 per hour……. $ 88,500
Depreciation…………………………….
15,000
Plant maintenance cost:
Variable at $9 per hour…………… 265,500
Fixed…………………………………. 163,000
Supervisory labor………………………
90,000
Total…………………………….. $622,000
4.
A fixed cost remains constant when a change occurs in the cost driver (or activity
base). A step-fixed cost, on the other hand, remains constant within a range but will
change (rise or fall) when activity falls outside that range. A fixed cost is constant
over a much larger range of activity than is a step-fixed cost.
5.
Ideally, the company should operate on the right-most portion of a step, just prior to
the jump in cost. In this manner, a firm receives maximum benefit (i.e., the maximum
amount of activity) for the dollars invested.
PROBLEM 6-38 (25 MINUTES)
1 Variable maintenance cost per hour of service
.
=
$4,470  $2,820
520  300
= $7.50
Total maintenance cost at 300 hours of service.........................................
Variable maintenance cost at 300 hours of service (300 hr.  $7.50) ......
Fixed maintenance cost per month .............................................................
Cost formula:
Monthly maintenance cost = $570 + $7.50X, where X denotes hours of
maintenance service.
PROBLEM 6-38 (CONTINUED)
2 The variable component of the maintenance cost is $7.50 per hour of
. service.
3 Cost prediction at 590 hours of activity:
.
6-6
$2,820
2,250
$ 570
Maintenance cost = $570 + ($7.50)(590) = $4,995
4 Variable cost per hour [from requirement (2)] ............................................
.
Fixed cost per hour at 600 hours of activity ($570/600) .............................
$7.50
$ .95
The fixed cost per hour is a misleading amount, because it will change
as the number of hours changes. For example, at 500 hours of
maintenance service, the fixed cost per hour is $1.14 ($570/500 hours).
PROBLEM 6-43 (25 MINUTES)
1.
Scatter diagrams:
 Present, in graphic form, the relationship between costs and cost drivers via a plot of
data points
 Require that a straight line be fit through the data points, with approximately the same
number of data points above and below the line
 Easy to use
 Provide a means to easily recognize outliers
Least-squares regression:
 Uses statistical formulas to fit a cost line through the data points
 Is a very objective method of cost estimation that uses all the data points
 Requires more computation than other cost-estimation methods; however, software
programs are readily available
High-low method:
 Relies on only two data points (for the highest and lowest activity levels) in drawing
conclusions about cost behavior
 Is considered more objective than the scatter diagram; however, is weaker than the
scatter diagram because it relies on only two data points
The least-squares regression method will typically produce the most accurate
results.
2.
Yes. The three methods produce equations by different means. Scatter diagrams
and least-squares regression rely on an examination of all data points. The scatter
diagram, however, requires an analyst to fit a line through the points by visual
approximation, or “eyeballing.” In contrast, least-squares regression involves the
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use of statistical formulas to derive the best possible fit of the line through the
points. Finally, the high-low method is based on an analysis of only two data points:
the highest and the lowest activity levels.
3.
These amounts represent the fixed and variable cost associated with the ticketing
operation. Fixed cost totals $312,000 within the relevant range, and Global American
incurs $2.30 of variable cost for each ticket issued.
4.
C = $320,000 + $2.15PT
C = $320,000 + ($2.15 x 580,000)
C = $1,567,000
5.
Yes, she did err by including November data. November is not representative
because of the effects of the Delta Western strike. The month is an outlier and
should be eliminated from the data set.
6.
Currently, most of the airline’s tickets are written through reservations personnel,
whose wages are likely variable in nature. Heavier reliance on the Internet means a
greater investment in software, Web-site maintenance and development, and other
similar expenditures. Outlays that fall in these latter categories are typically fixed
costs, assuming that the cost driver is the number of tickets. The outcome would
parallel the experiences of a manufacturing firm that automates its processes and
reduces its reliance on direct-labor personnel.
PROBLEM 6-44 (35 MINUTES)
1.
The regression equation's intercept on the vertical axis is $200. It represents the
portion of indirect material cost that does not vary with machine hours when
operating within the relevant range. The slope of the regression line is $4 per machine
hour. For every machine hour, $4 of indirect material costs are expected to be
incurred.
2.
Estimated cost of indirect material at 900 machine hours of activity:
S = $200 + ($4  900)
3.
= $3,800
Several questions should be asked:
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(a)
Do the observations contain any outliers, or are they all representative of normal
operations?
(b)
Are there any mismatched time periods in the data? Are all of the indirect
material cost observations matched properly with the machine hour
observations?
(c)
Are there any allocated costs included in the indirect material cost data?
(d)
Are the cost data affected by inflation?
4.
Beginning inventory .............................................................
+ Purchases ...........................................................................
– Ending inventory................................................................
Indirect material used ...........................................................
5.
April
$1,200
6,000
(1,550)
$5,650
August
$ 950
6,100
(2,900)
$4,150
High-low method:
Variable cost per machine hour
=
difference in cost levels
difference in activity levels
$5,650  $4,150 $1,500

 $5 per machine hour
1,100  800
300
Fixed cost per month:
=
Total cost at 1,100 hours ................................................................................
Variable cost at 1,100 hours
($5  1,100) ...............................................................................................
Fixed cost ........................................................................................................
$5,650
5,500
$ 150
Equation form:
Indirect material cost = $150 + ($5  machine hours)
6.
The regression estimate should be recommended because it uses all of the data, not
just two pairs of observations when developing the cost equation.
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